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Sunday, June 19, 2011

A Perversion of Banking

Now the discussion is what kind of incentives can be offered to banks so that they voluntarily lend some more money to Greece. Options seem to be that the new loans would be in a senior position to existing loans and/or some kind of guarantees from third parties (which third party? perhaps the EU?). It looks like the banks really have to be "incentivated" if one expects a contribution on their part and the EU-elites are trying hard to incentivate the banks. Thank you for that, dear EU-elites.

Wait!!! Is that the normal procedure when one tries to solve a borrower's debt service problem? NO, it is not!!!

The normal procedure is that negotiations take place between the borrower and his banks. Only if these negotiations cannot solve the problem entirely and if, as a result, the borrower would go bankrupt and the banks would lose a lot of money, the banks - perhaps together with the borrower - approach the state and inquire whether help from the state can be expected. If the consequences of a possible bankruptcy are severe enough, the state is likely to put in tax payers' money to help the company but, above all, to help the banks. Typically, the state will require a senior position for its loans (i. e. the state gets paid before anyone else). The banks do not get repaid but the quality of their loans improves. The bankruptcy is avoided and both borrower and banks are grateful to the state.

Here, the situation has become exactly opposite to what it should be! The banks seem to take it for granted that they will get repaid in full by the state! The state seems to be begging the banks to insist on only partial repayment and refinance the rest with a new loan. And the bankers seem to lean back in their chairs and say: "You have to give us an incentive so that we can do that".

When a borrower is in trouble, no bank ever dreams that they will get repaid in the foreseeable future. All they are hoping is that they do not need to put too much additional money into the borrower. The EU-elites, with their incompetence, have perverted the system to the extent that now the private lenders who might take a very significant loss under normal situations can more or less call the shots and set the terms under which they might possibly offer a little help.

Behind closed doors, the bankers must be having a ball. They must be making fun of EU-elites who make it so easy for them to reduce their risk. They will make a new loan of 100 Euro so that they get fully repaid on an existing loan of 1.000 Euro (what that ratio will eventually be is not decided yet).

And those bankers who work in the restructuring departments where they deal all the time with troubled borrowers, they will no longer understand the world.